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April 24, 2008

Living Trust - Is It Right For You?

Re: Using Trusts - Is a Living Trust Right for You?

"Revocable living trusts" have become popular estate planning tools. Whether a living trust is right for you, however, depends on a number of factors. A living trust may benefit you greatly, or you may be worse off with one.

A living trust is a trust that you set up during your lifetime, to which you transfer most or all of your assets. You get the income from the trust, and also have the right to withdraw principal. You can revoke or cancel the trust at any time during your life. At death the trust becomes irrevocable and its income and assets are disposed of under terms specified by you in the trust papers.

Why would you do this? The main advantage of the living trust is that its assets are distributed without going through the court probate process. That avoids a filing fee in the probate court. Also, trustee fees generally are lower than nonfamily executors' or personal representatives' fees would be. However, even if probate is avoided there will be the expense of preparing an estate tax return, valuing and transferring assets, and making a formal accounting and settlement. Also, to avoid probate, all probate assets must be included in the living trust. If some are left out, a probate proceeding still would be necessary. As a result, those with living trusts usually also have a will to direct any extra property into the trust.

Some of the other benefits and pitfalls to consider are:

    * Quicker distributions: Probating a will and gathering assets into the estate for distribution can take quite a bit of time. With a living trust, by contrast, all assets already are gathered together, so the trustee can make immediate distributions and continue paying bills as usual.
    * Protecting minors: Living trusts can help avoid the need to appoint a guardian to represent children's interests, which can cause delay and add to administration costs.
    * Privacy protection: Since probate records are public, the size of your estate, and the names of beneficiaries and the amounts each received, can come into anyone's possession. The size and terms of a living trust, by contrast, are not necessarily public matters.
    * Multiple residences: Those with real estate in more than one state can avoid the problems and expense of multiple probate proceedings by putting the out-of-state real estate in a living trust.
    * Income taxes: If you create a living trust, you will be taxed on its income in much the same way as if you continued to own the property outright.
    * Estate taxes: It's a fairly common misconception that living trusts save estate taxes, but that's not necessarily the case. The trust assets will be subject to estate tax just as if you continued to own them outright. Therefore, basic estate planning techniques, such as dividing a married couple's assets to ensure that they receive the benefit of two unified credit exemption equivalent amounts, remain important in the context of living trusts as well transfers at death by will.

As we said, living trusts make a lot of sense for some people and none at all for others. You have to consider all of the pluses and minuses as they relate to your particular situation to make an informed choice about a living trust. We would be happy to assist you in making the decision that's right for you. Please call if we can be of assistance.

If you found this article of interest and would like to find out how LBO can help you acheive your tax, insurance, and financial planning goals, please give us a call at 631.864.5206, or simply fill out our information request form and an LBO representitive will contact you as soon as possible.